Overview Of A Liquidator Having To Go After An Overdrawn Director’s Loan Account?
Must a liquidator go after an overdrawn director’s loan account? Yes, a liquidator must in principle go after an overdrawn director’s loan account but in practice, it will depend on the facts of the case.
There will be cases in which a company goes into insolvent liquidation in which a liquidator will not be obliged to pursue the overdrawn director’s loan account. The starting point however has to be the liquidator should address it to seek to make a recovery for the benefit of creditors.
What Is An Overdrawn Director’s Loan Account?
An overdrawn director’s loan account is a sum of money a director owes to a limited company.
Although a limited liability company is a separate legal person from its directors the link between a company and its directors cannot be overlooked. For an owner-managed business which is by far the most common structure, a director is someone who has held an office within the company and whose wealth, living standards and interests are typically linked to the success (or otherwise) of the company.
They may as a result have provided a personal guarantee to assist the company in obtaining finance for assets required for trading. Ultimately it is commonplace for a director to lend money to a company and to be owed money by a company in respect of wages, dividends and expenses incurred on behalf of the company.
Likewise, when a director needs money, they may look to the company for help. This potential two-way street can lead to a director owing money to a company or being owed money at a given time.
The accounting for this position is usually recorded as a running account or ledger known as the director’s loan account or sometimes as the director’s current account. When the director owes money to the company it is an overdrawn director’s loan account. When they are owed money by the company it is a director’s loan account in credit.
Liquidator Must Attempt to Realise The Assets
A liquidator must attempt to realise the known and accepted assets of a company provided it is in the commercial interests of the company to do so. This is one of the core liquidator duties and applies whether the company is solvent or insolvent.
An overdrawn director’s loan account being money a director owes to a company means it is an asset. It sits on the company balance sheet. The liquidator should attempt to realise it.
A failure by a liquidator to attempt to recover an overdrawn director’s loan account could be considered misfeasance and a breach of duty by the liquidator. It could also be considered negligence.
However, a failure to realise an asset after making a reasonable attempt will not usually put the liquidator at risk of criticism. There would usually have to be something more that brings a liquidator with the scope of being subject to criticism by the court or their regulatory body. Something more might be perverse conduct.
For a liquidator to be considered to have acted perversely (sometimes referred to as the perversity test) the action or inaction is one that no reasonable insolvency practitioner would have taken. Whilst steering clear of this might safeguard the insolvency practitioner from court criticism it might not necessarily be the standard their regulatory body would hold them to given the code of ethics and statements of insolvency practice.
How Would A Liquidator Go After The Overdrawn Director’s Loan Account?
The usual way a liquidator would go after an overdrawn director’s loan account is to issue a request to a director giving notice of the requirement to repay it.
If it is not repaid, then a liquidator may well escalate matters and instruct a solicitor to issue a statutory demand for it to be repaid. If that does not trigger engagement and resolution of the matter then it may well lead to a bankruptcy petition and if necessary to a bankruptcy order.
One would normally expect or hope a director will engage in the matter well before the suggestion of bankruptcy is made.
When A Liquidator Does Not Have To Go After An Overdrawn Director’s Loan Account
A liquidator does not have to go after an overdrawn director’s loan account when it is disputed and there is uncertainty about it.
The liquidator’s duty to realise the assets of a company in liquidation relates to the known and accepted assets. When the assets are disputed and uncertain they amount to claims (legally known as a cause of action).
Generally, a liquidator is not obliged to engage in costly litigation to resolve disputes over company assets. Particularly when a company has no funds available to contest disputed rights over assets. If a liquidator was to do so they could put themselves at some risk of personal liability for an adverse costs order if the court found against them. A liquidator is not required to put their (personal) assets at risk to further the interests of creditors in a liquidation.
As a result, when a director disputes the alleged overdrawn director’s loan account, provided the liquidator has made a reasonable attempt to recover it, they will not usually be under an obligation to go to court over the matter.
Why Might A Liquidator Not Go After An Overdrawn Director’s Loan Account?
A liquidator might not go after the overdrawn director’s loan account when it is not in the company’s interest to do so.
Either the matter is disputed and would be too costly to pursue risking wasting the other realisations or it is considered that the director does not have the financial ability to repay it.
Selling An Overdrawn Director’s Loan Account
If a liquidator has failed to realise an overdrawn director’s loan account through negotiation with a director they have other options available to them. One option is to sell (or as it is legally known as an assignment of) the overdrawn director’s loan account to a third party.
There is a market a liquidator can approach to sell insolvency claims such as an overdrawn director’s loan account. Litigation funders and other claims purchasing companies exist that may acquire such overdrawn director’s loan account claims.
Liquidator Releasing An Overdrawn Director’s Loan Account
When a liquidator has decided to release a director from having to repay the overdrawn director’s loan account they can formally write it off in an attempt to recover tax already paid over by the company to HM Revenue and Customs (“HMRC”).
There is now a voluntary process, set out in HMRC Insolvency Guidance September 2022. This enables the liquidator to release the overdrawn director’s loan account and it can lead to recovery by the company of any historic tax paid over to HMRC due to Section 455 of the Corporation Tax Act 2010.
However, a notable issue for a director is that whilst they may no longer have to pay the overdrawn director’s loan account back to the company, HMRC will often then seek to raise an income tax charge on the director personally in light of Section 415 of the Income Tax (Trading and Other Income) Act 2005.
There is a whole range of tax implications arising on an overdrawn director’s loan account.
